March 2020 ISM and Markit Surveys

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The Institute for Supply Management’s (ISM) monthly sentiment survey showed that U.S. manufacturing contracted in March. The PMI registered 49.1%, down 1.0 percentage point (PP) from the February reading. (50% is the breakpoint between contraction and expansion.) ISM’s manufacturing survey represents under 10% of U.S. employment and about 20% of the overall economy. Except for a surge in slow deliveries (+7.7PP), all sub-indexes were negative (and generally more so than in February). Declines in new orders (-7.7PP) and input prices (-8.5PP) were particularly noteworthy. 

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The pace of growth in the non-manufacturing sector -- which accounts for 80% of the economy and 90% of employment -- exhibited marked deceleration (-4.8PP, to 52.5%). Except for a jump in slow deliveries (+9.7PP), other sub-indexes were either less positive or outright negative. 

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Of the industries we track, however, only Ag & Forestry did not expand. Common themes among respondent comments included demand volatility from the coronavirus, supply chain disruptions, and oil. Most relevant were the following:

Construction -- “The coronavirus is having an impact, but not as much as we thought it would at this point. All sectors are staying busy. Although there are many customer concerns, we are finding work-arounds and adapting to the ever-changing situation.”

Real Estate -- “The coronavirus is affecting every aspect of business.”

Relevant commodities:

Priced higher – Labor, lumber, and oriented strand board.

Priced lower – Corrugate, crude oil, fuel (diesel and gasoline), and natural gas.

Prices mixed -- None.

In short supply -- Construction contractors and subcontractors, labor (temporary), paper products, paper towels, and toilet paper.

Findings of IHS Markit’s March surveys were reasonably consistent with their ISM counterparts.

Manufacturing -- Output declines at fastest pace since August 2009 amid COVID-19 outbreak.

Key findings:

* Production and new orders contract at fastest rates since financial crisis
* Employment falls at quickest pace for over a decade
* Business confidence drops to series low

Services -- Business activity declines steeply amid COVID-19 pandemic.

Key findings:

* Output and new business fall at fastest rates in series history
* Employment contracts at joint-sharpest pace since December 2009
* Business confidence drops to series low

Commentary by Chris Williamson, Markit’s chief business economist:

Manufacturing -- “The final PMI data for March are even worse than the initial flash estimate, with manufacturing output slumping to the greatest extent since the height of the global financial crisis in 2009.

"Growing numbers of company closures and lockdowns as the nation fights the COVID-19 outbreak mean business levels have collapsed. While some producers reported being busier as a result of stockpiling and anti-virus activities, notably in the food and healthcare sectors, these are very much the minority, and most sectors reported a rapid deterioration in demand and production.

"Orders for capital equipment have deteriorated at a rate not seen since data were first available in 2009 as firms stopped investing in machinery. Companies have meanwhile reined-in spending on inputs and households have pulled back sharply on many forms of spending, especially for non-essential and big ticket items. With export sales also sliding, factories are facing a broad-based slide in demand which is already resulting in the largest job losses recorded since the global financial crisis. Worse is likely to come as consumer spending falls further in coming months as lockdowns intensify and unemployment spikes higher."

Services -- “Business activity slumped to the greatest extent for more than a decade in March as efforts to contain the spread of the COVID-19 pandemic intensified. The survey indicates that the economy contracted an annualized rate approaching 5% in March, but with more measures to fight the virus outbreak being taken this decline will likely be eclipsed by what we see in the second quarter. More nonessential businesses are being forced to close, some are going bust, and lockdowns are leading to vastly reduced consumer spending,

“Employment and prices charged for goods and services are already being slashed at rates not seen since 2009 as companies seek to aggressively cut costs and discount charges in the face of collapsing revenues. Given that the survey does not include the self-employed, the jobless numbers are likely to rise at a much faster rate than even the slide in the PMI indicates. The policy response to the economic damage from the virus has already been unprecedented, but the collapse in business expectations for the year ahead tells us that companies are expecting far worse to come. IHS Markit is now forecasting an around 5.5% contraction of US GDP in 2020.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.